For a given shock to aggregate demand that moves the economy out of equilibrium in the complete model, the departure of GDP from potential lasts longer
A) the larger are the actual and expected inflation terms initially.
B) the smaller are the actual and expected inflation terms initially.
C) the smaller is the sensitivity of inflation to the GDP gap.
D) the more rapidly the labor market responds to disequilibrium.
E) none of the above.

Question

Quizplus · Accepted Answer

The smaller the sensitivity of inflation to the GDP gap, the longer it takes for inflation adjustments to bring the economy back to equilibrium, thus prolonging the departure of GDP from its potential.

For a Given Shock to Aggregate Demand That Moves the Economy